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WIKI ANALYSIS
State Bank of India (BSE:SBI), a public sector bank, is the largest bank in India.[1] SBI accounts for almost one-fifth of the nation’s loans.[1] The Total Income of the Bank for 2007-08 increased by 30.99% from Rs. 440.07 billion to Rs. 576.45 billion.[2] The Bank has posted a Net Profit of Rs. 67.29 billion for 2007-08 as compared to Rs.45.41 billion in 2006-07, registering a growth of 48.18%.[2]
Besides personal and corporate banking, SBI is also involved in NRI (Non Resident Indian) services through its network in India and overseas. As of May 2008, the bank had 21 subsidiaries and 10,186 branches. [2] SBI was adjudged the best bank in India for 2008 by ‘The Banker’ magazine of The Financial Times Ltd. [3] In addition to latest results, growth rates and performance data, the magazine also analyzed the available material on technology, acquisitions and key strategic developments.
Banks across Asia are looking to shore up their balance sheets as they prepare for a tougher business environment amid a global economic downturn. SBI, which had no direct exposure to sub-prime mortgages, has said that it would still need to raise USD 2-4 billion capital in 2009 to boost its Tier-1 capital adequacy ratio, but whether it would be done through a rights issue or other means has not been finalized.[4] Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It is composed of core capital, which consists primarily of equity capital and cash reserves.
Business Overview
Associate banks There are six associate banks that fall under SBI, and together these seven banks constitute the State Bank Group. They are:
- State Bank of Indore
- State Bank of Bikaner & Jaipur
- State Bank of Hyderabad
- State Bank of Mysore
- State Bank of Patiala
- State Bank of Travancore
Plans have been announced by State Bank of India to merge all associate banks by March 2009.[6]
SBI is the only Indian bank that figures in Fortune’s top 100 banks. Its 11,000 branches and 5,600 automatic teller machines give it a reach throughout the length and breadth of the country; its work force of 200,000 dwarfs all other banks in India (its nearest competitor is Punjab National Bank, which has around 56,000 employees[7]).[8] It is also the second largest bank in the world, measured by the number of branches and employee strength.[9]
Joint Ventures
SBI has entered into a lot of strategic agreements with banks, insurers and other companies. Insurance Australia Group (IAG) has signed a $170 million joint venture agreement with the State Bank of India (SBI) to establish a general insurance company in India. The newly formed company is expected to commence trading in 2009.[10]
SBI will become the first public sector bank in India to enter the custody services sector. State Bank of India (SBI) and Societe Generale Securities Services (SGSS), part of Societe Generale Group, have announced a joint venture which will offer custody and related services in India. The new company, SBI SG Custodial Services, will be based in Mumbai and offer a range of services to both foreign and domestic investors and clients, covering custody, depository, fund administration, registration and transfer agent services. The joint venture will leverage SBI’s strength in the Indian financial sector.[11]
India is a preferred destination for PE funds in Real Estate. SBI has also planned to capitalize on this opportunity by tying up with Australia’s Macquarie Group for a $2 billion infrastructure fund, and with an affiliate of Unitech Ltd, the country’s second biggest publicly traded real estate company, to float a private equity (PE) real estate fund.[12]
Business and Financial Metrics
SBI's income has risen continuously at an average 29.44% over 2002-08 (see Net Income graph) and it has been able to weather the 2008 financial storm better than both its private and public sector competitors. Net Profit for FY 08 stood at Rs 67.29 billion, up by 48.2% from Rs 45.41 billion in FY 07. The bank's current and savings account (CASA) ratio has remained stable at 43% even in the volatile times of 2007-08.[13] Net Interest Income (NII) is the difference between the revenues on the assets and the cost of servicing the liabilities.[14] From 2003-08 SBI's NII has grown at an average 9.6%, indicating improvement in operational efficiency. Similar trend has been observed in Total Income. Over 2003-08 SBI's Net Profit has more than doubled from Rs 31.05 billion to Rs 67.29 billion.
| Key Financial Metrics (in Rs. billions) | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|---|
| Net Interest Income | 310.87 | 304.60 | 324.28 | 359.79 | 372.42 | 489.50 |
| Non-Interest Income | 64.54 | 76.71 | 71.21 | 75.28 | 74.29 | 94.87 |
| Total Income | 375.41 | 381.31 | 395.49 | 435.07 | 446.71 | 584.37 |
| Reported Net Profit | 31.05 | 36.81 | 43.04 | 44.06 | 45.41 | 67.29 |
Source: Company reports[13]
Business Segments
Global Markets
In keeping with its integrated approach to all treasury activities in various markets in different time zones i.e., Forex, Interest Rates, Bullion, Equity and Alternative Assets, the Bank re-designated its Treasury Operations into “Global Markets”.
Trading profits from equity and mutual funds portfolio increased by 321% from FY07 to FY08. Interest income from investment portfolio increased in absolute terms due to the increase in the overall Fixed Income portfolio from Rs.1,369.27 billion to Rs.1,732.39 billion. RBI’s decision to increase Cash Reserve Ratio (CRR) rate from 6.00% to 7.50% in four stages during the year and withdrawal of interest payable on CRR balances impacted overall income from Treasury operations.[15]
Wholesale Banking Group
The Bank's Wholesale Banking Group consists of three Strategic Business Units viz., Corporate Accounts Group, Project Finance & Leasing SBU and Stressed Assets Management Group. The Bank has recently launched the "Wholesale Banking Initiative" to harness the SBI Group synergy for the benefit of the corporate customers by providing them with a ‘One Stop Shop’ facility for all their banking needs.[15]
- Corporate Accounts Group (CAG): With focused initiatives on fee-based services, fee-based income registered an impressive 62% growth during 2007-08. CAG continued on the growth trajectory in forex business registering a YOY growth of 79% and contributed 49% of the total domestic forex turnover of the Bank.
- Project Finance & Leasing SBU: The Project finance SBU focuses on funding core projects like power, telecom, roads, ports, airports, SEZ (Special Economic Zones)[16] and others. It also handles non-infrastructure projects with certain ceilings on minimum project costs. During 2007-08, the focus was on syndication and underwriting of project loans. Project Finance SBU took up projects involving total debt of Rs. 925.58 billion and achieved sanctions of Rs. 201.95 billion, while it syndicated Rs. 549.51 billion with other banks during 2007-08.
- Stressed Assets Management Group (SAMG): Stressed Assets Management Group (SAMG) was initially set up to take over all NPAs (Non-performing Assets) with outstanding of Rs. 5 crore and above for focused efforts in resolution of NPAs. The coverage has now been extended to Rs.1.00 crore and above across the country.
Mid-Corporate Group
The Mid-Corporate Group (MCG) has been immensely successful in attracting the business of Mid-Corporate units through relationship management and quicker credit processing. It is estimated that 38% of the Mid-Corporate universe in the country is covered by the bank. The total credit portfolio (fund based) of the Group stood at Rs 1,090.02 billion as on 31st March, 2008. This is more than the aggregate business handled by many of the top banks in the country. The average yield on advances went up from 8.76% in March 2007 to 9.73% in March 2008.[15]
National Banking Group
The Bank's National Banking Group (NBG) consists of three Business Groups viz., Personal Banking, Small & Medium Enterprise (SME), and Government Banking.[15]
- Personal Banking Business Unit: During 2007-08, Personal Banking domestic deposits have grown from Rs.1,908.70 billion to Rs.2,366.45 billion, showing a growth of Rs.457.75 billion (23.98 %) as against Rs.276.84 billion during the previous year.
- SME Business Unit (SMEBU): SME Business Unit is implementing multiple strategies to maintain Bank's premier position in SME financing. Advances to SME sector increased to Rs.763.29 billion as on 31st March, 2008 from Rs.586.74 billion of the previous year registering a Y-O-Y growth of 30%. Deposits under SME sector increased to Rs.1,651.68 billion as at the end of March 2008 from Rs.1,230.54 billion of previous year, recording a growth of 34% during the year.
- Government Business Unit (GBU): The bank's linkage with Government business are widespread. No wonder, its 7000 branches are conducting Government Business.[17] The large network of branches provides easy access to deposit the Government dues and pension payments, services related to taxes, excise duties, customs duties, VAT (Value-Added Tax)[18] and other fiscal tools.
Rural Business Group
During the year 2007-08, Rural Business Group of the Bank comprising rural and semi urban branches, accounting for about 70% of the branch network of the Bank grew by Rs.298.07 billion in deposit representing a growth of 22.8% and Rs.187.34 billion in advances representing a growth of 23.4%. This was against a growth of Rs.163.67 billion in deposit and Rs.176.84 billion in the advances in the previous year.[15]
International Banking Group
As on 31.03.2008, the Bank had a network of 84 overseas offices spread over 32 countries covering all time zones. Net Profit from Bank’s overseas operations (including subsidiaries and joint ventures with more than 50% shareholding) registered a growth of 84% during the fiscal year mainly driven by significant growth of 48% in Net Customer Credit.
The Bank has further intensified its thrust in the area of syndicated foreign currency loans and participated in corporate syndicated loan deals amounting to USD 27.57 billion during April 2007 to March 2008, besides extending several bilateral facilities aggregating US$ 933 million. The Bank has participated to the extent of USD 3.04 billion in 31 Merger and Acquisition deals aggregating USD 22.56 billion in 2007-08 as against participation to the extent of US $ 1.07 billion in 13 deals aggregating US $ 5.37 billion during the previous year. The Bank was ranked No. 1 in the Asia Pacific (excluding Japan and Australia) in the mandated arranger/book runner league table for syndicated loans by IFR Asia.[15]
Key Trends and Forces
Macro economic risk is the biggest risk for SBI, given its size, penetration and exposures in India
Government regulations and the country's macroeconomic policies affect SBI's expansion and liquidity the most. Key ratios such as Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Repo rate and Reverse Repo rate are all controlled by the government and affect the bank's liquidity.
International operations' increasing contributions to total income expected to continue and boost income further
SBI is laying greater and greater thrust on its international operations, capitalizing its presence in 32 countries. Being the largest commercial bank in India, it is one of the most capable banks to cater to Corporate India's growing appetite for international mergers and acquisitions. Net Profit from Bank’s overseas operations (including subsidiaries and joint ventures with more than 50% shareholding) registered a growth of 84% during FY 2007-08 mainly driven by significant growth of 48% in Net Customer Credit. The Bank was ranked No. 1 in the Asia Pacific (excluding Japan and Australia) in the mandated arranger/book runner league table for syndicated loans by IFR Asia in 2007-08.[15]
11,111 branches and still counting- a source of low-cost deposits
Bank branch expansion in India is regulated by RBI and banks cannot expand their branch network without RBI’s approval. As low-cost deposits are directly tied to the size of the branch network, the number of branches a bank has, is a key success factor for any bank in India. Branch expansion is particularly a key factor for SBI, given that SBI's profit growth is driven by core business. The operating profit increased by 54.5% yoy, given a robust increase in the NII and a modest rise in the non-interest income. Net profit rose by 40.2% yoy after accounting for a 30% increase in the tax paid.[21]
Public sector banks facing stiff competition from private sector banks
Public sector banks are facing competition from their private sector counterparts and foreign banks entering India in all realms of financial services. While public sector banks enjoy a pre-eminent position in terms of low-cost deposit base (also called CASA deposits in India – stands for Current Accounts and Savings Account), private-sector banks have been increasing their CASA base steadily over the years. ICICI Bank, the largest private bank in India, has expanded its CASA market share by 218% over the period of 2003-2007. The bank’s CASA deposits have grown at a CAGR of 61% over the same period, compared with a growth of 17.1% for public-sector banks, 32.5% for private sector banks and 29% for foreign banks in India.[22]
Private sector banks, armed with usually more efficient management and employees, are employing all tricks- branch expansion, mergers and acquisitions, international operations, etc. to compete with public sector banks.
Competition
- Punjab National bank - Punjab National Bank (PNB) is the second largest government-owned commercial bank in India with about 4,500 branches across 764 cities.[23] This financial institution offers services in personal and corporate banking, including industrial, agricultural, and export finance, as well as international banking. It competes with SBI mostly in retail lending and wholesale businesses[24]
- ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is India's largest private sector bank and second largest overall in terms of assets. Together with its subsidiaries, ICICI Bank offers a complete spectrum of financial services and products ranging from commercial banking to investment banking, mutual fund to insurance. It is also the largest issuer of credit cards in India.
- HDFC - Housing Development Finance Corporation Limited Bank Limited or HDFC Bank is the second largest private bank in India, catering to the whole universe of financial services from commercial to investment banking, mutual fund to insurance.[25] On February 25, 2008 HDFC agreed to buy Centurion Bank of Punjab. The combined entity has the largest branch network among private banks in India, a strong deposit base of around Rs 1220 billion and net advances of around Rs 890 billion.[26]
- Bank of Baroda - Bank of Baroda is another private player. It has a rich countrywide network of over 2800 branches. It also has significant international presence with a network of 74 offices in 25 countries.[27]
| Total Deposits | Total Advances | Net profit | Total Assets | Branches | |
|---|---|---|---|---|---|
| State Bank of India | 4,355.21 | 3,373.36 | 45.41 | 5,665.65 | 10,186 |
| ICICI Bank | 2,305.10 | 1,958.66 | 31.10 | 3,453.12 | 1,400 |
| Punjab National Bank | 1, 398.60 | 1,990.48 | 20.48 | 1,990.48 | 4,500 |
| HDFC Bank | 1,007.69 | 634.27 | 15.90 | 1,332.51 | 1,412 |
| Bank of Baroda | 1,520.34 | 1,067.01 | 14.35 | 1,795.99 | 2,800 |
(all money figures in Rs. billions, as on 31st March, 2008) Sources: [28] [29] [30]
References
- ↑ 1.0 1.1 SBI Website
- ↑ 2.0 2.1 2.2 SBI Annual Report 2007-08
- ↑ The Banker Awards - 2008
- ↑ SBI would need to raise capital in 2009
- ↑ SBI Revenue and Net Income
- ↑ SBI's Merger Plans with associate banks
- ↑ , Reserve Bank of India's Profile of Banks 2007-08
- ↑ , Businessworld article on SBI
- ↑ , SBI- second largest branch network in world
- ↑ SBI's alliance with IAG
- ↑ SBI's alliance with Societe Generale
- ↑ SBI's alliances in real estate sector
- ↑ 13.0 13.1 , SBI's FY 2007-08 Press Release
- ↑ , Wikipedia definition of Net Interest Income
- ↑ 15.0 15.1 15.2 15.3 15.4 15.5 15.6
- ↑ , Special Economic Zone explained
- ↑ SBI's Government Business
- ↑ , VAT explained
- ↑ Dun & Bradstreet Study - India: Economic Insights
- ↑ , SBI & ICICI will be worst hit by CRR hike, says Goldman Sachs
- ↑ Indiabulls Securities Report on SBI, 10 Nov, 2008
- ↑ , ICICI article on Wikinvest
- ↑ , Punjab National Bank website
- ↑ , Punjab National Bank profile on Hoover's
- ↑ , HDFC Bank website
- ↑ Press Release CBoP 20-05-2008
- ↑ , Bank of Baroda website
- ↑ , State Bank of India- Financial Highlights
- ↑ , Rediff Money- HDFC Bank Financial Highlights
- ↑ , Bank of Baroda- Financial Highlights, Page 9
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